Re-Examining Twitter

Summary

Should the tech “losers” of last week be given a second chance?

Technology companies up yet another week: adding $148 billion in total value.

Re-examining Twitter: is it a buy on weakness?

Welcome to the tech sector's sixteenth edition of "Buy on Weakness?", a series of articles that sifts through the underperformers of the week to find potential investment opportunities in the large-cap tech world.

The table below highlights the top 20 tech companies - worth $10 billion or more in total equity value - that have performed the poorest in the previous five trading days.

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Source: DM Martins Research, using market data compiled from Zacks

With another big week of earning announcements in the books, the tech sector continues to climb north with a 2.1% return on the week.

This week, our focus will be on Twitter (NYSE:TWTR) as it continues to slip with a 9.5% loss on the week. We will re-examine our previous thesis to see if Twitter is now worth buying into.

Diving deeper into the data

The top 20 tech losers of the week have a median 2017 forward P/E of 15.5x, compared to the S&P 500's median trailing P/E of 14.6x and the overall tech sector's 26.3x. This week's top 20 group is expected to grow EPS in 2017 by 13.9%, and the companies generate median dividend yield of 1.1% (11 of the 20 companies are dividend-payers).

The table below highlights, in green font, the three best-positioned tech companies in each of the following categories: projected EPS growth, dividend yield, forward P/E and forward PEG (P/E divided by percentage-point EPS growth).

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Re-examining Twitter:

With the Street reacting negatively to the Q2 2016 earnings release, we will take another look at our prior analysis on Twitter.

· Is Twitter continuing to improve its cost management and is there room to cut costs even further?

· Do we see the ARPU making a turnaround Twitter's new initiative in the Live-streaming space?

· Could Twitter be a potential buyout candidate and is it a buy at the current price?

Cost Management Flat lined in Q2 2016

While making significant strides in the last year to create a leaner environment, it appears Twitter may have hit a wall. G&A and S&M have changed minimally, indicating the cost management may have bottomed out in the near term. It is also notable that R&D has picked up over 14% since the last quarter.

Live Streaming shows promise and might be the answer Twitter has been looking for

While it is a bit too early to tell how much this will move the needle for Twitter, I think live streaming has the potential to bring back the ARPU growth we have been looking for. These deals are set up as revenue splits, so the overall success of the event will be the real driver. The upcoming NFL and election seasons are must-see events that could be excellent revenue generators to get the initiative off the ground. The recent pullback in share prices may have de-risked the bet on the potential upside.

Buyout?

Despite lack of material indication, it's plausible that there could be an acquisition play made for Twitter. As the race continues for platform superiority, keeping in mind deals like LinkedIn-Microsoft and Yahoo-Verizon, Twitter seems like a prime candidate for a buyout, especially with the current, modest market capitalization of $11.5 billion.

While still a speculative play, we see the merit in getting into Twitter at the current price point. Although there is a good chance we will continue to see sluggish growth, we believe the downside is currently limited.

Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This research report was written by a contributing author and edited by Daniel Martins. It provides a contrarian view to what D.M. Martins Research had previously published on TWTR, in June 2016.